[emphasis added by OP]

The Income Tax System is Broken

43 Percent Of Americans Pay No Federal Income Tax, A Sign That Something's Wrong, Writes Declan McCullagh

April 15, 2009 | by Declan McCullagh

(CBS) On April 15, don't be surprised if the line at your local post office is a bit shorter than usual. That's because your neighbors may not be paying any income taxes this year.

An astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly-filing "taxpayers" - the word must be applied sparingly - who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.

Those numbers come from an analysis published yesterday by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. Neither is a low-tax or conservative advocacy group; the Urban Institute was created under the Johnson administration during the Great Society era, and it receives most of its funding from the federal government.

"You've got a larger and larger share of people paying less and less for the services provided by the federal government," says Roberton Williams, a senior fellow at the Tax Policy Center. "The concern is that the majority can say, 'Let's have more benefits, spend more,' if they're not paying for it. It's 'free.' That's not a good thing to have."

By historic standards, today's situation is an aberration. Between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent, dipping to 18 percent in 1986, according to Tax Foundation data. In the 1990s, the owe-no-money percentage hovered around 25 percent of taxpayers.

But then politicians began another round of tinkering with the tax code, adding reams of new pages to an already incomprehensible set of rules that even the guy overseeing the IRS can't seem to figure out.

Democrats wanted to lower taxes on the least affluent, while Republicans wanted to lower taxes on everyone. The result was bipartisan enthusiasm for tax credits aimed at everything from children (1997) and college students (1997) to hybrid cars (2005) and homebuyers (2009). Many of these credits dole out cash to people even if they report no income, making them mere government handouts.

"There's no difference at all in terms of the effects on the federal deficit," says Williams of the Tax Policy Center. "It's perfectly equivalent. It's just easier to say, 'I cut your taxes' as opposed to 'I created a new federal program to send money to people.'"

I'm talking here about federal income taxes, not other taxes like Social Security, Medicare, state income taxes, sales taxes, or car registration taxes, some of which are extracted through payroll deductions. The owe-no-money crowd tends to get hit by at least some of those.

The perils of today's situation should be obvious. The United States is close to a tipping point - where most people can skip the post office run on April 15 to mail a check because they're expecting one from the government instead.

"It is somewhat odd that you have a decreasing number of folks paying into the federal income tax system, a decreasing number of folks who have a stake in what the government pays for," says Matt Moon of the non-partisan Tax Foundation in Washington, D.C.

It then becomes tempting to vote for politicians promising more and more handouts, paid for by money forcibly extracted from an ever-shrinking number of their neighbors. In addition to being immoral, it's poor public policy: people who pay no taxes but nevertheless get benefits are less likely to be careful overseers of their elected representatives.

"At some point people become less and less invested in making sure their government is accountable and frugal," says Peter Sepp, vice president for policy and communications at the National Taxpayers Union, a lower-tax advocacy group. "If you pay very little for getting all kinds of government benefits, you might view those programs as a bargain, even though they may waste tens of billions of dollars a year."

As a candidate, President Obama promised still more tax credits, including ones aimed at child care, "clean cars," and savings accounts. As the Wall Street Journal explained at the time: "You can receive these checks even if you have no income-tax liability. In other words, they are an income transfer - a federal check - from taxpayers to nontaxpayers. Once upon a time we called this 'welfare,' or in George McGovern's 1972 campaign a 'Demogrant.'"

A recession, the stimulus, and innumerable bailouts have placed Mr. Obama's plans on hold. But the expiration of the Bush tax cuts at midnight on December 31, 2010 will renew interest in a tax law rewrite.

That will be an opportunity to gut the current system and replace it with something simpler and fairer. After all, if government is important enough to force most of us to work until April 13 to pay its bills, why shouldn't everyone share the pain?

Declan McCullagh is the chief political correspondent for CNET and a CBS News EconWatch contributor. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives with his wife in the San Francisco Bay area.

By Delcan McCullagh

© MMIX, CBS Interactive Inc. All Rights Reserved.

Wow. Many people here need to learn the difference between a tax rate and an EFFECTIVE tax rate.

I PROMISE you that big corps pay a MUCH lower effective tax rate than the average middle class citizen. Corps like to throw out their rate before taking deductions. That would be like you stating you have tax rate of 25% but then taking your mortgage interest deduction which drops you to 7% but pretending 25% is still your tax rate. That is EXACTLY what corporations do.

Do you really think Exxon or Walmart pay any where near what you and I pay percentage wise? HAHA.

Wow. Many people here need to learn the difference between a tax rate and an EFFECTIVE tax rate.

I PROMISE you that big corps pay a MUCH lower effective tax rate than the average middle class citizen. Corps like to throw out their rate before taking deductions. That would be like you stating you have tax rate of 25% but then taking your mortgage interest deduction which drops you to 7% but pretending 25% is still your tax rate. That is EXACTLY what corporations do.

Do you really think Exxon or Walmart pay any where near what you and I pay percentage wise? HAHA.

I know some people think we should gig big companies simply because they're big, but wouldn't they either: 1) pass on any added expense to the consumers or 2) relocate their business in another country where the taxes aren't so high?

Does that mean that you think that when we give corporations big tax breaks and incentives, they pass the savings on to the consumer?

Hopefully President Obama is considering making it not so lucrative for American corporations to operate overseas and to hire employees who are non-residents of this country.

So instead of incentivizing them to hurt the American worker and the mid-level American tax payer, he will incentivize them to operate in a way that is beneficial to this country. You think that's a bad thing, right?

Does that mean that you think that when we give corporations big tax breaks and incentives, they pass the savings on to the consumer?

No, but I believe they can afford to hire more employees.

Now if only we could make it where they keep the jobs here. Maybe tax breaks for those who do.

Does that mean that you think that when we give corporations big tax breaks and incentives, they pass the savings on to the consumer?

Of course not. They ARE greedy bastards, no matter what side of the issue you take.

So instead of incentivizing them to hurt the American worker and the mid-level American tax payer, he will incentivize them to operate in a way that is beneficial to this country. You think that's a bad thing, right?

Actually, I think he'll incentivize big business to take their entire operations overseas, leading to more unemployment here. But hey, Big mama government will take care of all those jobless folks, right?

Actually, I think he'll incentivize big business to take their entire operations overseas, leading to more unemployment here. But hey, Big mama government will take care of all those jobless folks, right?

Certainly it appears that many of the decisions government makes is geared towards putting as many people as possible on the gubment dole.

Actually, I think he'll incentivize big business to take their entire operations overseas, leading to more unemployment here. But hey, Big mama government will take care of all those jobless folks, right?

big business has moved many operations over to india/singapore - at least in the tech world for quite some time. ie: customer service/help desk/etc.

the better argument is can he bring those jobs "back"...?? and i for one would have no problem w/tax relief for those companies who do so.

big business has moved many operations over to india/singapore - at least in the tech world for quite some time. ie: customer service/help desk/etc.

the better argument is can he bring those jobs "back"...?? and i for one would have no problem w/tax relief for those companies who do so.

Companies have "outsourced" jobs to increase profitability (like you said) already. Obama's plan would impose stiff tax penalties for companies that do that. But the question is, if you were the CEO, what would you do? 1)Take a cut in profits by re-hiring Americans ADDED to the cut in profit you're going to take because of the tax increases on corporations. 2) Take a cut in profits via tax penalties because you continue to outsource ADDED to the cut in profit from regular tax increases. or 3) Move the whole damn operation to India, where you can push your profits through the roof and pay minimal taxes.

Of those choices, I can guess what most companies will do, even if it means transplanting even more American jobs overseas.

Obama is a smart man and he is a fair one. If he has a resonable choice of whether to penalize corporations for bad choices that harm America or reward them for good choices that benefit America, I believe he will reward them for good choices.

In fact, reawrding bad behavior is how we got where we are. Bush put the incentives and rewards out there for corporations, which created a high-profit greed-driven frenzy. That's what got us where we are today. Only a very few Americans have benefitted from those incentives. Millions have been harmed by them. I am sorry that some of you think that rewarding corporations for their extremely ruthless, greedy behavior is the foundation to make capitalism work.

For capitalism to work in America, you can't break the back of the majority of Americans. You can't topple the economy and expect capitalism to survive. There always have to be checks and balances and hopefully that's ALL we need, just some oversight that will prevent American corporations from flushing this country down the toilet.

Obama is a smart man and he is a fair one. If he has a resonable choice of whether to penalize corporations for bad choices that harm America or reward them for good choices that benefit America, I believe he will reward them for good choices.

I agree, he's a smart guy. I hope he doesn't let his ideology over-ride his intellect.....but the fact is, raising taxes in a recession is a political act, and not that smart (why cut company profits in a recession? That's almost certain to lead to more job losses).

In fact, reawrding bad behavior is how we got where we are. Bush put the incentives and rewards out there for corporations, which created a high-profit greed-driven frenzy. That's what got us where we are today.

Again, that's a little simplistic. Enron was the poster child of capitalism gone bad, and it didn't tank the economy (although that is little consolation to the employees that lost their retirement). It was the housing bubble that really kicked the economy in the groin. Bush actually pushed for more regulation in housing, but Barney "Fannie Mae" Frank (and, it could be argued, congress in general) killed that. Heck even the banking bubble was related to housing...

Only a very few Americans have benefitted from those incentives. Millions have been harmed by them. I am sorry that some of you think that rewarding corporations for their extremely ruthless, greedy behavior is the foundation to make capitalism work.

Here's the fundamental liberal / conservative battle line. The mindset like you stated above completely disregards the personal accountability that we all must take. If one makes $2000 / month, they can't afford a million-dollar home, no matter what banker or morgage broker says they can.

For capitalism to work in America, you can't break the back of the majority of Americans. You can't topple the economy and expect capitalism to survive. There always have to be checks and balances and hopefully that's ALL we need, just some oversight that will prevent American corporations from flushing this country down the toilet.

BJean, capitalism works to protect the workers as well. In a capitalistic system, the workers can leave one job if another offers them a better deal. If the government gets in too heavily (like they're heading now.....automotive, banking, housing, health) there will be no alternative. No private business can ultimately compete with the government in a market system.

Enron was one company. You wouldn't expect the failure of one company to cause the economy to tank.

The idea to encourage banks to make more loans so that people could buy houses wasn't a bad thing. It was the lenders who came up with the schemes that encouraged homeowners to get in way over their heads. Neither Barney Frank nor the other congressional members wanted that or encouraged it. The banks have to take responsibilty for their shoddy lending practices. What we learned from it is that there has to be some oversight to make sure things like Enron aren't common and that lenders don't pull the stuff they pulled that have affected our housing industry and nearly tanked our economy.

I do not disagree that individuals must take responsibilty for their purchases and to know whether they can afford them. The fact is, this has become a credit card society. The banks have made billions on giving credit cards to people who really shouldn't use them. It's no different with the home lenders. They concocted programs that would appeal to people even though the people shouldn't be taking out such large loans. Banks and other lenders assure people that they CAN afford more credit cards and bigger houses and more luxury goods.

Do you blame people for using credit cards when they are solicited to open new accounts day after day in the mail and on the phone? Banks love the customers who cannot pay their credit card bills off every month. That's where they make their money.

We pay our cards off every month and they hate us. Of course they keep upping our credit card limits to ridiculous amounts. We could build a house just using our credit cards. It's crazy. I actually knew a doctor who did use his credit card when he built his multi-million dollar home in Orlando. His builder let him use a cost plus payment method where the doc paid the subs, and he raked in all the frequent flyer miles. Now that's what I call creative financing.

Actually I did speak to the fact that capitalism works to protect workers also. And I do not believe that the people running the government want to run corporations in America. I believe they have had to take steps to reign in companies and banks that represent greed gone wild. I believe they want to get out of that business as quickly as possible, and I sure hope they do.

Heck Jack, you post enough for the both of us. I shouldn't be expected to come up with anything because no one can top the amount of stuff you and gadget bring to us and I can't find anything that is left wing enough to rebut all the extremely conservative claptrap you all are able to track down. Congratulations, you win. I'm sure everyone is happy to have it all so clearly spelled out for us.

Our president hates his country. My goodness.

If anyone is paying attention, it is easy to see the source of hatefulness being peddled in this country.

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Our president hates his country. My goodness.

Written by a Canadian no less. Somehow I feel he is not qualified to say if Obama loves or hates his country. After all everyone who hates their country runs for President because it is so easy to attain and a breeze to be.

I remember when I complained about the Iraq war being called UnAmerican and that I hated my country. For awhile after 9/11 saying anything bad about the country made you a traitor according to the right. Now they compare Obama to Hitler (which shows their lack of history knowledge) and it is all good.

I commend you for your generous, laid back attitude.

I commend you for your generous, laid back attitude.

Wait are you Canadian?

Just to make sure we are all clear I was talking about the author of the article not being qualified because he is Canadian to judge Obama's patriotisim.